Commodity Futures

Presented By

• Anupam dubey -18

• Khetharam malviya-33
• Suhas patil-41
• Vivek shah-50
• Pragathi Shetty-51
• Sweta Srivastava -55
What is Commodity Futures??

• A commodities exchange is an exchange where various

commodities and derivatives products are traded.
• A futures contract is an agreement for buying or selling a
commodity for a predetermined delivery price at a specific future
time. .
• Futures are standardized contracts that are traded on organized
futures exchanges that ensure performance of the contracts and
thus remove the default risk
• The major function of futures markets is to transfer price risk from
hedgers to speculators.
 History of Commodity futures

• The Chicago Board of Trade (CBOT), the largest derivative

exchange in the world, was established in 1848 where forward
contracts on various commodities were standardized around 1865.
•
• The first ever organized derivatives market evolved with the setting
up of Bombay Cotton Trade Association Ltd., in 1875.
• However, the advent of modern day derivative contracts is attributed
to the need for farmers to protect themselves from any decline in
the price of their crops due to delayed monsoon, or
overproduction.
•
Multi Commodity Exchange

• MCX started in November 2003

• MCX is India's no. 1 Commodity Exchange
• MCX “COMDEX’’ is India's First and only Composite
Commodity Futures Price Index
• Major Competitor is NCDEX
• Globally Ranks no. 1 in Silver
• No. 2 in Natural Gas
• NO 3 in Crude oil and Gold in Futures Trading

MCX
Global commodity exchanges

• 1 New York Mercantile Exchange (NYMEX)

• 2 London Metal Exchange (LME)
• 3 Chicago Board of Trade (CBOT)
• 4 New York Board of Trade (NYBOT)
• 5 Kansas Board of Trade
• 6 Winnipeg Commodity Exchange, Manitoba
• 7 Dalian Commodity Exchange, China
• 8 Bursa Malaysia Derivatives exchange
• 9 Singapore Commodity Exchange (SICOM)
•
•
• 10 Chicago Mercantile Exchange (CME), US
• 11 London Metal Exchange
• 12 Tokyo Commodity Exchange (TOCOM)
• 13 Shanghai Futures Exchange
• 14 Sydney Futures Exchange
• 15 London International Financial Futures and Options
Exchange (LIFFE)
• 16 Dubai Gold & Commodity Exchange (DGCX)
• 17 Dubai Mercantile Exchange (DME), (joint venture
between Dubai holding and the New York Mercantile
Exchange (NYMEX))
•
Participants in Commodity
Futures

Δ Farmers/ Producers
Δ
Δ Merchandisers/ Traders
Δ
Δ Importers


Δ Exporters
Δ
Δ Consumers/ Industry
Δ
Δ Commodity Financers
Δ
Δ Agriculture Credit providing agencies
Δ
Δ Corporate having price risk exposure in commodities
•
Players in Commodity future Markets

• Hedgers
• Speculators
• Arbitragers



 Hedging
• Hedge against price fluctuations
• Lock-in the price for your produce
• Control your cost
• Ensure continuous supply
Short Hedge

• A short hedge is a hedge that requires a shot position in futures

contracts.
• A Short hedge is useful when the hedger already owns an
assets is likely to own the assets and expects to sell it in
future.
Long Hedge

• Hedge that involves taking a long position in a futures contract

are known as long hedges.
• A long hedge is used when a company knows it is likely to
purchase an assets in future n would like to lock in price now.
Hedge ratio

• Hedge Ratio is the ratio of the number of futures contracts to be

purchased or sold to the Quantity of the cash asset that is
required to be hedged.
•
• Formula
•
HR = ρ*(σ∆CP / σ∆FP)


•
•
Symbol for calculating Hedge Ratio

•
∆CP Change in Cash price
•
∆FP Change in future prices

σ∆ CP Standard Deviation of CP

σ∆ FP Standard deviation of FP

ρ Coefficient of correlation between

∆CP & ∆FP

HR Hedge Ratio
 Example of Hedge Ratio

§ Mr ‘A’ Gold jeweler buy 8 kg of gold in the cash market as a raw

material to make jewelry from it.
§ Mr ‘A’ want to protect himself from a decline in the prices of gold till
the jewelry is ready for sale in 15 days.
§ S.D (σ) of change in cash price of gold and changes in future price
of gold over 15 day period is 1.17 and 0.62 respectively.
§ ρ= coefficient of correlation between the CP of gold and FP of gold
for 15 days is 0.60.
§ Standard future contract size is 1 kg
§
§
§
OPTIMAL HEDGE RATIO IS

 HR = ρ*(σ∆CP / σ∆FP)


 HR = 0.60 * (1.17/0.62)


 HR = 1.13


 MrA will sell 1.13 * 8kg = 9.04 kg of gold futures contracts

to hedge the physical exposure of 8kg gold.
Speculation
• Speculation means anticipating future price movements
to make profits from it.
•
• The Main objectives of Speculation in a commodity
futures market is to take risks & profit from
anticipated price changes in the futures prices of an
asset.
•
• A Speculator will buy futures contracts ( long position)
if he anticipates an increase in the price of the
commodity in future and he will sell futures contracts
(short position) if he anticipates a fall in the price of
the commodity in future.
•
Types Of Speculation

• Long position in future

•
• Short position in future
 Basis
• Basis is the difference between the cash price of an
asset and the future price of underlying assets
• It can be positive or negative
• Based on basis, market said to be in
• Contango
• Backwardation

 BA
Evaluation of Basis CK
W
AD
AT
IO
O

N
NG
TA
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CO
 Spread
• Spread is the difference in prices of two future
contracts.
• There are 2 types of spread strategy
• Intra commodity spread (same commodity)
• buying & selling spread
• Inter commodity spread (different commodity)
Arbitrage
• Arbitrage means locking in a profit by simultaneously
entering into transaction in two or more markets
• Mathematically it can be expressed as
 F(0,n)=So(1+c)
• There are 2 types of arbitrage opportunities
• relationship between spot and future prices in terms of
basis
• And relationship between two futures contracts in terms of
spread changes
 Types Of Arbitrage

• Cash and carry arbitrage

•
• Reverse cash and carry arbitrage

 

Analysis & Comparison


Comparison of Closing Prices.
Analysis of Compounded Returns
Settlement Of Future Contracts

• How would contracts settle?

• What would be the settlement period?
• Are deliveries compulsory?
• How would the settlement take place in commodity futures
market?
•
Methods of Settlement
• Closing out
• Cash settlement
• Physical delivery
• Exchange of futures for Physical


Final settlements


 *Cash Settlement
*Delivery Settlement


 Cash Settlement
Settlement for all open positions on the expiry date
Determine all open positions for all the clients
Determine the final settlement price for the contract
Determination of Final Settlement Price
Underlying spot price on Expiry day
Disseminated to market at end of day
 Trading Hours


› Weekdays :
› Morning Session 10 a.m. to 4 p.m.
 Evening Session 5 p.m. to 11 p.m.
› Saturday: 10 a.m. to 2 p.m.
Simultaneously three (3) months’ contracts are available for

trading
Contract expiry is on 20th of every month

Expiring Contracts can only be traded till the end of

Morning Session
•
Lot size

 Specific lot size for every commodity

For Example : For Gold Contracts
 Prices Displayed : Per 10 Grams
 Minimum Contract : Per 100
 Grams (& in multiple thereof)
 Delivery Lot : Per 1 Kilo
•
Good News

Thank you